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Addressing the Foreclosure Crisis Mike Calhoun

Addressing the Foreclosure Crisis Mike Calhoun. Housing Assistance Council Washington, DC December 3, 2008. Center for Responsible Lending.

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Addressing the Foreclosure Crisis Mike Calhoun

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  1. Addressing the Foreclosure CrisisMike Calhoun Housing Assistance Council Washington, DC December 3, 2008

  2. Center for Responsible Lending • Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. • Affiliated with Self-Help, one of the nation’s largest community development financial institutions. • Over $5 billion of financing to 55,000 low-wealth families, small businesses and non-profits. 2

  3. CHRONOLOGY OF THE CRISIS • Unsustainable mortgage products and practices • A lending bubble that inflated the housing bubble • Securitization of these loans into AAA securities and derivatives • Leverage of investments that amplified gains and risks • Loss of market confidence • Deleveraging as asset values fall • Foreclosures creating more downward home values

  4. The Products That Got Us Into this Mess: Subprime Home Loan Traits • Typically hybrid ARMs with built-in payment shock • Most carry large prepayment penalties for refi prior to first interest rate adjustment • No escrows for taxes or insurance – prompts further refis • Typically refinance loans • Typically broker-originated • Up-front fees far higher than in prime market • Debt-to-income ratios can rise as high as 55% • Underwritten to introductory rate – no expectation that borrower could afford the loan after rate adjustment

  5. Unnecessary Losses: Most HomeownersSold SP Loans Qualified for Better Loans • A Wall Street Journal Study found that 60% of borrowers who received SP loans in 2006 had credit scores high enough to qualify for prime loans. • Even those who did not qualify for prime loans could have received 30 year fixed rate SP loans with payments similar to and often lower than the exotic arm loan they received. 5

  6. Chairman Bernanke’s Conclusion Fed. Reserve Chairman Ben Bernanke: “Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.” (July 14, 2008 Statement) (

  7. How did this happen?Market Incentives • “The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn't afford.” (Alan Greenspan to Newsweek, “The Oracle Reveals All,” (9/24/2007) pp.32-3) • Yield Spread Premiums – paying brokers to put borrowers into loans with higher rates than they qualify for. • “The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans … What would you do?”(CEO of Ownit Mortgage to The New York Times (1/26/2007) pp. C1, C4. • Why would lenders make these loans? “Because investors continued to buy the loans.” (Mortgage Bankers Ass’n Chief Economist to CNN (2/20/2008)) 7

  8. WHAT’S COMING?Current Foreclosure Forecasts – Subprime 2 million homeowners with subprime mortgages will lose their homes to foreclosure, most by year-end 2009. This is in addition to the 700,000 homes with subprime loans currently in foreclosure or REO. (Source: Credit Suisse, Foreclosure Trends 4/23/08) 8

  9. Racial Impact of Subprime Loans Higher cost (subprime) 1st lien loans: 2005 HMDA Data • # of higher % of total loans cost loans to group • African American 388,471 52% • Latino 375,889 40% • White 1,214,003 19% 9

  10. Troubles Move Beyond Subprime 10

  11. Alt-A Loans Made to credit-worthy borrowers with some element of added risk, e.g.: • Reduced borrower income and asset documentation • Debt-to-income ratios above Fannie/Freddie guidelines • Credit history with some problems (e.g., low scores or delinquencies, but no recent charge-offs or bankruptcy) • High loan-to-value ratios

  12. Next Wave of Foreclosures: Payment Option ARMs • Affords low monthly payments by allowing borrowers several payment options each month • 75% of POARM borrowers make lowest payment • based on low teaser rate in effect for 1 month or 1 day • includes no principal and less than all of interest owed • Interest shortfall is added to loan balance • After 5 years, or when loan balance hits 115% of original loan, payments sharply increase • Eligibility often was based on initial low payment 12

  13. 2nd Wave – Alt-A and Option ARMs 13

  14. Foreclosure Forecast – Total Market 6.5 million of all mortgage loans will fall into foreclosure over next 5 years (includes 1.2 million currently in foreclosure or REO). For the market as a whole, 1 out of every 8 homeowners who currently has a mortgage will lose the home to foreclosure. (Source: Credit Suisse, Foreclosure Trends 4/23/08) 14

  15. Rural Patterns • 5.2% of all lower-rate loans were rural (i.e., outside MSAs). • 7.6% of all higher-rate loans were rural. • 36% of all rural loans were higher-rate (contrasting with 27% of urban loans).

  16. Within Rural Higher-Rate • 64.9% of all higher-rate were for refinance or home improvement purposes (versus 59.1% in urban areas).

  17. Rural Refinance Lending by Race, Ethnicity, & Income

  18. Rural Purchase Lending by Race, Ethnicity, & Income

  19. Foreclosures • HUD delinquency estimates show a 4.8% foreclosure rate for both rural and urban homes between 1/07 and 7/08.

  20. Ever Increasing Leverage Mortgage Backed Securities (MBS) are securities backed by pools of mortgages. Collateralized Mortgage Obligations (CMOs) are securities backed by pools of MBS, and are often highly leveraged. Some CMOs are backed by pools of CMOs. 20

  21. Foreclosure’s Vicious Cycle • Home price declines lead to foreclosures • Foreclosures flood already oversaturated home market with more inventory, depressing home prices further, and leading to even more foreclosures 21

  22. Impact On Consumer Finances

  23. Current Policy Responses • Voluntary Loan Modifications • Hope for Homeowners Program • Emergency Economic Stabilization Act of 2008 • Funds for recycling of foreclosed properties

  24. Existing Obstacles to Voluntary Modifications • Insufficient Servicer Staffing • Misaligned Financial Incentives for Servicers • Fear of Investor Lawsuits • Pooling and Servicing Agreement Limitations • Second Mortgages 25

  25. Additional Policy Responses Foreclosure Deferment Required Loss-mitigation efforts Court-supervised Loan Modifications Additional Consumer Protections 26

  26. Family Wealth Creation • 3% downpayment with 3% HPA gives annual return of 100% on LMI family investment. • Only leveraged asset strategy for many LMI families. • As of 12/31/07, median equity growth of $30,897 per family -- current market could eliminate completely. • LMI families seeking new homeownership should be encouraged to rent and save for next two years in areas where price declines are likely.

  27. Lease-Purchase Program Goals • Neighborhood Goals • Minimize cost of foreclosures and vacant homes • Turn foreclosures into wealth building assets for low-income families and communities • Household Goals • Provide path to homeownership for first-time homebuyers and credit-impaired homeowners • Program Path • Test multiple pilots (Charlotte & Chicago initially), then pursue scalability

  28. Funding Strategy Acquisition Rehab CRA/PRI 5% Loss Reserve Capital Funding Neighborhood Redevelopment Financing Structure Local Non-profit Developer Self-Help Fannie Mae Bulk Purchase REOs Lease to buy mortgage SECM Purchase Loan Servicers Sell mortgage w/ credit enhancement Local Bank Open Market Purchases Purchase Mortgage Foreclosed Properties Long-term Affordable rentals Resale Lease to buy Lease-Purchase Pilot Structure

  29. Lease-Purchase Mortgage Program • Variation on Self-Help/Fannie Program (30-yr fixed) • Initial borrower is local nonprofit partner • Self-Help recourse in place of individual qualification • Target for tenant to purchase home and assume loan within 5 years • Tenant lease payments cover mortgage and operating expense during rental period (and will not exceed FMR) • Tenants screened for affordability at origination • Affordability and credit capacity evaluated at assumption • Credit and homeownership counseling required

  30. Lease-Purchase Critical Issues Wealth-Building Asset Vacant REO Neighborhood & Property Selection Program/Asset Management Tenant Assumption & Beyond Acquisition/Rehab • Find location where economics work (or subsidy is there) and capacity exists • Price/market stability • Volume/efficiency • Selectivity • Acquisition strategy (bulk vs. retail) • Capacity • Financing • Costs • Broad skill set (counseling, asset & prop mgmt.) • Value proposition for nonprofit • Counterparty risk • Is assumption a value proposition for tenant? • Qualifying tenants • Turnover capacity of nonprofit • L-P loan performance unknown – 5% risk capital for SHVF

  31. Peachtree Hills – Foreclosure Distribution

  32. Supportive Services • Homebuyer counseling services • Neighborhood liaison/organizing and work with HOA • Community policing • Code enforcement • Infrastructure improvements • Landscaping upgrades • Attention to solid waste and general clean up • Funds to support rehab of homes and future homebuyer down payment assistance

  33. Conclusion • 2 to 6 million completed foreclosures will occur from 2007 through 2012. • $400 billion minimum of vacant properties to be redeployed or torn down. • One option is to match vacant properties with families that can lease-purchase, but are not qualified to purchase today. • $10 billion investment could leverage $100 billion of lease-purchase redeployment (500,000 units). • Public sector investment will occur because the spillover neighborhood costs will be devastating.

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